* FTSEurofirst 300, Euro STOXX 50 up 0.3 pct
* Euro STOXX 50 posts biggest monthly gain since Feb
* Tesco warning hits shares of food retailers
* Airlines down after volcano eruption in Iceland
By Francesco Canepa
LONDON, Aug 29 European shares eked out small
gains in thin, choppy trade on Friday, helping one key euro zone
index of blue chips record its biggest monthly rise since
Most European bourses closed off their morning highs,
however, after euro zone inflation data slightly cooled market
speculation about fresh monetary stimulus by the European
Central bank, a key driver behind the market bounce over the
past three weeks.
Euro zone inflation dropped as expected to a fresh five-year
low in August, data showed on Friday, but it was not likely to
force the ECB into immediate policy intervention next week.
Dovish comments by ECB President Mario Draghi last week had
fuelled market bets that the central bank was preparing to pump
more into the system, possibly via purchases of government or
corporate bonds, a measure known as quantitative easing (QE).
"I think what people realise is that for the ECB to engage
in public-sector QE..., the ECB has to see the whites of the
eyes of deflation," Wouter Sturkenboom, investment strategist at
Russell Investments, said.
"As the numbers come through, those conditions are not being
met so...they have to reassess their case."
Sturkenboom still expected the ECB to be ready to act if
needed but argued that the central bank would first wait to see
the impact of its new long-term loan programme, which is due to
start in September and aims to give banks an incentive to lend
more to the real economy.
The FTSEurofirst 300 index of top European shares
closed 0.3 percent higher at 1,373.82 points, having traded as
high as 1,376.58 points before the euro zone inflation data.
The euro zone blue-chip Euro STOXX 50 also rose
0.3 percent, helping it to a third straight weekly rise and
leaving it up 1.8 percent for August, its biggest monthly gain
Price action was volatile and volume on the index was 25
percent lower than its average for the past three months.
Speculation about the ECB's next move had temporarily
diverted the market's focus from events in eastern Ukraine,
where at least 2,593 people have been killed in fighting between
government forces and pro-Russian rebels since mid-April,
according to a senior U.N. human rights official.
Yet the Ukrainian crisis remained a major headwind for
European equities. Ukraine called on Friday for full membership
in NATO, its strongest plea yet for Western military help after
accusing Russia of sending in armoured columns that have driven
back its forces on behalf of separatist fighters.
Shares in Britain's biggest retailer Tesco dropped
6.6 percent after it cut its profit forecast for the third time
in three years and slashed its interim dividend by 75 percent.
The warning hit the shares of other UK supermarket chains,
with Sainsbury down 4.3 percent and Morrisons
down 5 percent.
European airline shares retreated after a small eruption
occurred north of Iceland's Bardarbunga volcano. That prompted
the Icelandic Met to raise the warning code for aviation to red,
the highest level, for a few hours before returning it to orange
based on an assessment that no threat to aircraft existed.
In 2010, an ash cloud from Iceland's Eyjafjallajokull
volcano closed much of Europe's air space for six days.
Shares in Air France were down 1.8 percent, with
easyJet down 1.3 percent.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today's European research round-up
(Additional reporting by Blaise Robinson in Paris, Stephen
Jewkes in Milan and Victoria Bryan in Frankfurt; Editing by Mark